Canada: New "Bank Act" Amendments: A Partial Answer To Calls For Reform

The Government of Canada is amending the Bank Act and other associated statutes. The amending legislation (the Financial System Review Act ("FSRA")) received royal assent on March 29, 2012.

Clearer Priority Provisions for Secured Creditors

The amendments clarify the order of priority where multiple secured parties have a security interest in the same collateral, particularly where there are competing interests under the Bank Act and a provincial Personal Property Security Act ("PPSA"). The amendments overrule two companion Supreme Court of Canada decisions, Bank of Montreal v. Innovation Credit Union¹ and Royal Bank of Canada v. Radius Credit Union.² Both cases involved priority disputes between the credit union's prior unregistered security interest under a provincial PPSA, and the bank's subsequent security interest taken and registered under the Bank Act. The Court found that the credit union's "first-in-time" unperfected PPSA security interest took priority over the bank's subsequently registered Bank Act interest, noting that the "commercially absurd results" of the decision indicate a need for legislative reform.³

The FSRA responds to this need by providing that a security interest under the Bank Act has priority over the rights of "any person who had a security interest in that property that was unperfected at the time the bank acquired its security in the property."⁴ In addition, a general definition of "unperfected" is added to the Bank Act, which refers broadly to the law under which the security interest is created.⁵

However, a prior unperfected security interest would still take priority where the bank has "knowledge" of such unperfected security interest.⁶ This exception may prove to be problematic. "Knowledge" is an undefined and ambiguous term and may give rise to arguments based on "constructive knowledge". Given the size of Canadian chartered banks, this possibility may undermine Parliament's quest for certainty. As a result, banks should continue to take PPSA security and/or security under the Quebec Civil Code in addition to security under the Bank Act until the ambiguities are resolved.

Although the amendments to the Bank Act provide a greater degree of certainty about priority, there remain a number of outstanding issues. Commentators have noted in particular that the FSRA fails to rise to the level of introducing a first-to-register or first-to-perfect priority rule, which would better clarify the relationship between the Bank Act and the PPSAs. In addition, the amendments are silent on priority as between a prior perfected interest and a subsequent Bank Act interest. Presumably, the common-law first-in-time principle still applies to such a scenario.

Footnotes

1. Bank of Montreal v. Innovation Credit Union, 2010 SCC 47, [2010] 3 SCR 3.

2. Royal Bank of Canada v. Radius Credit Union, 2010 SCC 48, [2010] 3 SCR 38.

3. Innovation, supra note 1 at para 4.

4. Financial System Review Act, Section 38 [FSRA].

5. FSRA, s. 36.

6. FSRA, s. 37.

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